US Banks have borrowed $50 billion from the Fed

From the department of the lender of last resort:

Banks in the United States have been quietly borrowing "massive amounts" from the U.S. Federal Reserve in recent weeks, using a new measure the Fed introduced two months ago to help ease the credit crunch, according to a report on the web site of The Financial Times.

The newspaper said the use of the Fed's Term Auction Facility (TAF), which allows banks to borrow at relatively attractive rates against a wide range of their assets, saw borrowing of nearly $50 billion of one-month funds from the Fed by mid-February.

The Financial Times said the move has sparked unease among some analysts about the stress developing in opaque corners of the U.S. banking system and the banks' growing reliance on indirect forms of government support.

I'm going to assume here that this report is about unusual borrowings rather than the ordinary ones that banks make from the Fed from time to time.

All central banks function as the "lender of last resort" which basically assures depositors that, even if the bank goes bankrupt (which would be ironic), their money can still be withdrawn. In return, banks are supposed to follow rules set down by the central bank on how it lends money.

What is concerning about this current situation is that more and more banks (I am assuming) are needing to borrow money from the Fed. While at one point we should be happy that our modern financial system has this "safety net" in case of accident, it is worrisome that this safety net is currently being utilised.

To put it simply - this increased borrowing by banks shows that they are suffering rather worrisome losses. In the short term, the Fed's lending of money is a good thing because it props up an increasingly fragile financial system. In the medium-long term this is bad, because such lending will probably have an inflationary effect in a monetary environment that is already overheating, despite the current downturn. Stagflation in other words.